Rebalancing the Economy
The U.S. needs domestic reform, not foreign scapegoats.


National savings could be boosted by swiftly cutting the government deficit, but even if that were politically palatable, it could do more harm than good if it is done too rapidly and sends the economy into deeper recession or a deflationary spiral. It would be better to pursue fiscal reform that brings the deficit down gradually, and to focus above all on enacting a host of microeconomic reforms that would incentivize private savings and keep that rate high and rising even after the economy recovers and consumers have paid down the mountains of debt they accumulated in the 2000s.

This might be easier to accomplish than is commonly assumed. It has become fashionable to blame America’s low private savings rate on the moral failings and profligacy of American consumers. Yet Americans didn’t simply become degenerate gamblers over the last three decades — they were in large part responding rationally to real incentives laid down by one of the most anti-savings tax codes in the Western world. Americans do not need a moral reawakening to raise their savings — they need comprehensive tax reform.

The federal government collects a higher portion of its revenue from individual income taxes (nearly 50 percent) than almost any other advanced economy. The tax rate on corporate income is the second highest in the world. Is it any wonder that Americans continue to shun investment and guzzle oil — the single greatest component of the U.S. trade deficit — when federal gasoline taxes run at about 8 percent and the capital-gains tax — a tax on the returns from savings — runs at 15 percent, and is set to rise to 20 percent next year?

The government could reduce the negative incentives in place against savings by redirecting some of the tax burden toward consumption. This would have the reciprocal benefit of disincentivizing consumption (of both domestic goods and, crucially, imports). Implementing a valued-added tax or national sales tax, not as a supplement but as a substitute for income taxes, could go a long way to achieving this aim. Many European nations are far ahead of the United States in this regard, employing VAT taxes to fill postfinancial crisis budget gaps, rather than using income taxes. The government could set positive incentives for savings as well by establishing a category of tax-free savings accounts for retirement and health care. Offering tax breaks for the reinvestment of company profits and consolidating tax write-offs for capital depreciation could achieve a similar result for corporations.

All of these policies would face an array of political roadblocks. But our politicians cannot dither forever. At some point, the rhetoric about nefarious exchange rates will be recognized for the distraction that it is, and the real roots of America’s huge deficits will have to be addressed. President Obama would do well to get serious about making these hard choices, and to do so sooner rather than later. For a president who so consistently touts the importance of America’s “moral authority” as its most important foreign-policy tool and argues so passionately for the power of international dialogue, Obama’s conduct on this issue so far have been puzzling. If there is one area of international relations where those beliefs are most true, where unilateral action is most certain to fail and cooperation has the greatest ability to achieve an absolute and measurable positive outcome for all nations, this is surely it. It would behoove the administration to heed its own philosophy, lead by example on internal economic reform and seek compromise on international trade with the zeal it seems so ready to afford in the rest of its foreign policy.

Daniel Krauthammer is a writer in Los Angeles. He holds a master’s degree in financial economics from Oxford University.